I read an article about Snap (NYSE:SNAP) CEO Evan Spiegel recently that was highly complimentary of the 28-year-old wunderkind. It got me thinking about Snap stock, which went over $10 on Mar 13 for the first time in six months, a hallelujah moment if there ever was one for Spiegel and the rest of Snap’s management team.
With Snap stock on a roll, is $20 the next logical target for Snap stock?
Yes and no. Here’s why.
Why $20 Could Be in the Cards for Snap Stock
My InvestorPlace colleague Josh Enomoto paid me a nice compliment recently. And it just happened to be related to Snap stock.
“Certainly, those who recommended speculating on SNAP stock finally have credibility. Last September, InvestorPlace’s Will Ashworth stated that SNAP stock was worth gambling on as long as it stayed under $10. As is usually the case, he was right on the money. Year-to-date, SNAP stock is up over 69%,” Enomoto wrote February 19.
While Josh’s words are very kind, he knows all too well that the business of investment prognostication is one-third analysis and two-thirds luck. As they say, “Even a blind squirrel finds an acorn once in a while.”
In my September article, I made it abundantly clear that I wouldn’t buy Snap stock. Now that it’s doubled in price, I still wouldn’t.
The question is whether you should.
I’ve not always been a fan of Spiegel’s. In July 2017, I questioned the wisdom of Speigel and his wife, Miranda Kerr putting their wedding photos on Instagram, Facebook’s (NASDAQ:FB) website which threatens Snapchat’s very existence.
“I have to wonder about their decision to put the photos on Instagram — one of the social media apps that could put Snap out of business, ultimately sending SNAP investors scrambling to buy FB stock, if they already haven’t,” I wrote.
However, I have to give him credit for risking it all in the short-term for an app redesign that would deliver consistent revenue and profit growth in the long-term. It’s not easy to take that kind of risk when the entire world is telling you that you’re making a huge mistake.
But innovation is what drives great companies.
That’s why I’m a huge fan of Elon Musk’s despite the fact that he’s as erratic a CEO as Donald Trump is a President. However, when I read stuff like I did earlier this week about Tesla (NASDAQ:TSLA) updating the Model 3’s software to give the car 5% more power, I bow down to the innovation master. It’s brilliant.
Referring back to the beginning where I mentioned a recent article that got me thinking about Snap stock, iHeart Radio CEO Bob Pittman, who once was a top executive at Time Warner, said something very telling about Spiegel and Snapchat.
“Anytime you do a redesign of anything, you get a backlash because you’ve changed what people already know,” Pittman said. “If you’re going to drive consumer products, you have to be willing to keep evolving it and moving it. I think Evan is probably one of the prime examples of someone who’s willing to do that.”
Now, before you get on the computer to buy Snapchat stock, it’s important to know that iHeart Radio is a Snapchat partner, so his comments have to be taken with a modicum of caution
That said, Spiegel’s got the innovation chops to get Snap to non-GAAP and then GAAP profitability. But it’s going to take some more time.
Why $20 May Not Be in the Cards for Snap Stock
The one thing I didn’t mention about my colleague, Josh Enomoto, is that he knows a thing or two about technology. That makes him a better evaluator of Snap’s prospects than myself.
Here’s what he had to say in mid-February.
“When it comes to ARPU, whom is SNAP going to target for revenue opportunities? Snapchat’s advertisement sales and engagement run a distant third to Facebook and Twitter(NYSE:TWTR), who are first and second, respectively,” Josh wrote.
“Even more problematic, media and entertainment firms run the most advertisements on Snapchat’s platform. That’s fine, but the company won’t be able to raise its ARPU by selling ads to companies in other sectors.”
Essentially, what he’s saying, is that the chances of SNAP delivering a string of earnings beats beyond its impressive Q4 surprise are very small. As Snap stock has appreciated another 15% since mid-February, any negative surprise when it reports first-quarter earnings at the end of April will most certainly send the SNAP stock price diving into single digits.
In other words, there’s still a lot of risks associated with Snap stock, and those risks may have increased now that it’s doubled in price.
The Bottom Line on Snap Stock
I would love to say I know for sure that SNAP will go to $20. If I did, I wouldn’t be writing about its stock; I’d be making money from it.
At $5, it was easy to recommend that aggressive investors take a shot at SNAP stock. At $10, the odds of it doubling a second time in a year are low to non-existent.
However, if you have the stones to handle a lot of risks, it’s one of the more intriguing low-priced bets available in today’s market.
It’s not one I’d take, but that doesn’t mean you shouldn’t.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.